A government with solid democratic legitimacy in the form of a majority popular vote could have more leverage to pursue the sort of structural reforms which Italy urgently needs to boost growth – in our view, the real issue rather than debt and deficit reduction. In this respect we note that as economy minister in the 2006-08 Prodi administration, Mr Bersani promoted relevant reforms – albeit unsuccessfully at that time within the context of a divided and unstable left-of-centre coalition. It could be that, having secured the leadership of the BC coalition through a strongly contested primary election (in the wake of which the BC has united behind him), Mr Bersani would be better placed this time around, were he to secure an election victory, than he was five years ago and than a Monti-led government would be.

The most likely outcome, in our view, is that Monti will join a centre party like the UdC, which has been very supportive of him over the past months, and eventually become part of the centre-left coalition. [...]. Will Italy need OMT support? With a PD-led coalition, we think this is unlikely. The Italian economy benefits from several structural strengths, including high savings, a relatively small banking system, low household leverage and small regional budgets. A stable coalition, especially with Monti, will not need to ask for OMT support.

The PD is supporting Monti, although it seeks more pro-growth and redistributive policies, similar to what is advocated by the French Socialists and the German SPD, for example. Bersani's PD is also pro-euro and pro-European. A victory from the central-left, the current central scenario, should thus be seen as a neutral or mild positive by markets. Mr Bersani was a minister for economic development under the Prodi governments, where he pushed through several liberalisation decrees.

The scar left by the recession is likely to have damaged the supply side of the economy, thus further lowering potential growth – to just 0.5%. Mr. Monti’s track-record on the structural reforms has been mixed, in our view. They are certainly a good step in the right direction. Yet, both in number and scope, they could have been more far-reaching, i.e., they should have been broader and deeper to materially shift Italy’s future growth path.